You’re facing a dilemma:
One of the directors in your business isn’t quite pulling their weight or you’ve had a bit of a disagreement. The relationship isn’t really working and keeping the director on might cause irreparable damage to your business and potentially, the people within it. Although you’ve tried to talk things through, he or she refuses to resign. The situation is complex – the director is also a shareholder in the company.
What should you do?
The decision is easy, right? All you have to do is remove the director at Companies House. Well yes, that will need to be done, but that’s the last piece of the jigsaw. There’s a whole lot more to do before you get to that.
The first thing to know is that directors don’t automatically qualify as employees of a company and so usually, they are employed under a contract to ensure this is the case. Your go to document to check the detail relating to termination should be the Directors Service Agreement (it’s a form of employment contract), which will also contain salary information, details on duties, responsibilities etc. If there is no contract or the contract makes no mention of what to do in the event you wish to terminate the directors’ employment, you should consult a lawyer to help you navigate the matter. Not following the correct process here could give rise to a potential unfair dismissal claim if the dismissal was not for a potentially fair reason and/or no fair procedure was followed before dismissing and if the director has been employed for more than two years.
The next step is for you to consult your company’s Articles of Association to understand the key circumstances under which a director can be removed. The Articles will provide further procedural information including how a director can be removed i.e., by unanimous decision. If the Articles make no mention of this, it is possible under law for the shareholders to remove the director from his or her position by an ordinary resolution of members, a decision which will have to be made in a general meeting of shareholders by a simple majority i.e., requiring more than 50% of the votes.
We don’t like to bore you with the provisions, but the Companies Act does say you’ve got to follow a few rules to remove a director. If you don’t, it could render the resolution invalid. One of the most important parts of the legislation in this area is to ensure you provide special notice to the company detailing the shareholder’s intention to propose the resolution at least 28 days before the general meeting. You’ll also have to let the director know so that they can attend the meeting to negotiate their position, if they wish to.
If the director is a shareholder, you should also take a look at your Shareholders’ Agreement, which may include provisions dealing with decision making and removal of directors. It should also include details of how the shares should be dealt with after the director has been removed.
If you’ve reached a majority decision and assuming all the relevant procedures and requirements have been followed, the next step would be for you to remove the directors’ details from your Companies House listing. You definitely shouldn’t take this step first. It’s super important to work through the Directors’ Service Agreement, Articles and Shareholders Agreement before making any changes at Companies House – they’re ultimately the key documents that govern how you run and protect your business and of course, how you do things the right way.
Tend Legal, London